The descending triangle pattern is a popular bearish continuation pattern that is created by drawing a horizontal line that connects low points and a trend line that connects lower highs. Sometimes the pattern occurs in a reverse during an upward trend as well. It is one of the three important triangle patterns defined by classical technical analysis. The other two being the ascending triangle and the symmetrical triangle.
The descending triangle chart pattern also goes by the name of a falling triangle, which allows traders to measure the distance from the start of the pattern, represented by the highest point, all the way to the flat support line. This type of technical analysis identifies a downward trend, which will eventually break through the resistant levels causing the price action to plummet.
Traders look for descending triangles because the pattern indicates a breakdown may be coming. Usually, when a price drop happens, buyers come in the push the price up even higher. However, the descending triangle indicates when there is a lack of buying pressure. Here, sellers begin selling at even lower prices, which suggests a series of lower highs. A breakdown usually occurs when volume is high, and the move following is fast and severe.
Descending triangles are popular because they provide traders with the chance to make considerable profits over a short term. To trade the pattern, technical traders take a bear position after a high-volume break. The price target is usually equal to the entry point minus the vertical distance between drawn lines when the breakdown takes place. The stop loss position is taken at the upper trendline. To profit from a descending triangle, traders have to identify clear breakdowns and avoid false indications. They also have to consider that in case of no breakdowns, the price may test the upper resistance before moving down again to the lower support line.
Descending triangles are the opposite of ascending triangles as they have a horizontal upper trendline and a rising lower one. Reversals can happen with descending triangles as well, but they are usually considered bullish in nature. All triangle patterns provide traders the opportunity to short the stock and set a profit target.
Descending Triangle with Moving Averages
It is important to note that when trying to anticipate a potential breakout, we want to also look at other technical indicators. The simple moving average trend helps confirm the signal to execute the trade.
To help predict upward breakouts, when the price drops after the busted triangle, we check to see if the breakout price is above or below the 200-day simple moving average. When the breakout is below the 200-day simple moving average to trend performs 5% better on average.
To help predict a downward breakout, the opposite is true. When the price breakout is above the 200-day simple moving average, the busted triangle sees a price increase of 13% versus those below the 200-day simple moving average.
Why Is the Descending Triangle Important?
The descending triangle is one of the most popular chart patterns as it’s easy to understand and clearly shows the demand in the stock, or lack thereof. When the price breaks down below the support level, it indicates the stock is likely to continue downward. This bearish pattern enables traders to make above-average returns over a short period. Descending triangles may also point to a reversal pattern or uptrend, but in most cases, they represent a bearish continuation pattern.
Attributes
- Pattern type: Continuation
- Indication: Bearish
- Breakout confirmation: The confirmation for this pattern is a close below the lows on above-average trading volume.
- Measuring: Subtract the height from the highest highs and the low of the pattern and then subtracted from the breakout level.
- Volume: The volume declines throughout the descending triangle formation, expanding on the breakout.
Conclusion
The descending triangle pattern can act as a great indicator of a future trend, but it’s not without its limitations. It’s a favorite among traders as the pattern is easy to recognize, but it has been known to have false breakouts, so traders need to manage their trades accordingly. To learn more about stock chart patterns and how to take advantage of technical analysis to the fullest, be sure to check out our entire library of predictable chart patterns. These include comprehensive descriptions and images so that you can recognize important chart patterns scenarios and become a better trader.
